With the end of the year fast approaching, let’s remember that we still have time to save on taxes. Even though Washington D.C. is fighting it out to see what our future tax code will look like, we know the rules today and we can take steps now to help us for tomorrow. Here are four strategies to potentially reduce your tax bill for 2017:
- You may be eligible to contribute to a ROTH or IRA account. The max any individual can contribute is $5,500 with a $1,000 catch-up contribution if you are over 50 (for a total of $6,500). There are income limitations, so make sure you talk with your accountant or financial advisor to see if you qualify. Depending on your current income and future projected income a ROTH or an IRA may be suitable, so you may have to do some planning to decide. The good news is that the contribution doesn’t have to be made until the due date of your tax return (not including extensions).
- ROTH conversions are a good strategy to try and maximize tax free growth. This strategy consists of moving money from a traditional IRA to a ROTH, paying the tax now and then having the ROTH to grow tax free. This strategy can be highly advantageous but needs to be evaluated carefully as raising income over certain levels can create unintended consequences. It is usually most beneficial with households that have retired but have not yet started taking social security. This allows you to convert the traditional IRA at lower tax brackets than if you were collecting all sources of income.
- Tax loss harvesting is another strategy that has been shown to add .3% of additional return to a portfolio over time.¹ Loss harvesting consists of looking through the portfolio and purposefully realizing (selling) any positions that have losses. This not only allows you to use the losses against any gains that you have realized throughout the year, but also allows you to write off up to $3,000 against income. After selling at a loss don’t purchase the same security again for 30 days or you will fall trap to the wash sale rule and won’t be permitted to take the loss.
- Gifting your required minimum distribution (RMD) to a charity is another great way to reduce your tax. This is an especially favorable strategy for people who don’t itemize on their tax returns. It allows them to get a deduction for at least part of their charitable gifting when they typically wouldn’t get any. Depending on where your income falls it may also reduce the taxable part of your social security, causing a double effect on reducing taxes.
While D.C. keeps rolling on their tax reform and those temperatures continue to drop, don’t get frozen in place on your tax plan. There are still actions you can take in order to improve your 2017 tax return, so don’t wait.
